Taxes: Working with a New IRS AuditorBy
Taxpayers and their representatives may have to adjust their processes when dealing with a new IRS auditor.
For the first time in years, the Internal Revenue Service (IRS) has a major hiring initiative that’s bringing in many new employees. As a result, taxpayers and their representatives might encounter a relatively new IRS examination agent or auditor. One telltale sign that you have a new auditor is that he or she will be accompanied by an on-the-job instructor (OJI). The new auditors will be trained but may not be experienced in field, office, or correspondence exams. Here’s what taxpayers can expect when encountering a new auditor.
A new IRS auditor might be nervous because he or she is new on the job and because the OJI will be present throughout the audit. Taxpayer representatives can put new auditors more at ease by asking where the auditor and OJI are from and about their professional background both inside and outside the IRS. Practitioners might also ask where the auditor received his or her training, how long the classes were, and what subjects were covered. Not only are people proud of their professional accomplishments, but sharing this information helps the practitioner assess the level of knowledge that the auditor has and how best to communicate the facts and law pertaining to the case at hand.
The IRS may request a field audit or an office audit. Taxpayers or their representatives who hold a valid power of attorney can request a change of venue, a change to the field audit site, a change of auditors, or a change of area office.
Per the Internal Revenue Manual (IRM) section 18.104.22.168, the site of a field audit depends on where the books and records are normally maintained.
A taxpayer representative requesting a transfer of an examination should make that request in writing (IRM 22.214.171.124). That request must include the reason for the transfer, the current address(es) and phone number(s) of the taxpayer and business, and the location of books and records. In the taxpayer representative’s request, the “representative must indicate that they are in possession of the records to be examined and will make them available in an expedient manner,” per IRM 126.96.36.199. The location of the taxpayer’s representative is generally not considered when determining where the audit will take place. If the transfer is for an audit of a joint return, both spouses must be aware of the transfer request and the decision.
Per IRM 188.8.131.52, auditors evaluate written requests to change venues on a case-by-case basis, in accordance with Treas. Reg. §301.7605-1. If a taxpayer disagrees with a transfer, the auditor will consider where the audit can be performed most efficiently (Reg. §301.7605-1(e)(1)(iv)).
There should be at least 13 months remaining on the assessment statute expiration date as of the date that the taxpayer’s transfer request is received; otherwise a one-year extension on the statute date will normally be requested as a condition for the transfer (Reg. §301.7605-1(e)(4)). These decisions usually take 10 to 30 days. Throughout this process, auditors are being judged on their ability to perform and make decisions.
New auditors are likely not as familiar with the tax laws as experienced taxpayer representatives. If this is the case, explaining the law as if it were new and specifically citing the taxpayer’s position back to the Internal Revenue Code, regulations, and court cases can speed up the audit process.
New auditors are also being trained to make evidential, factual determinations, so producing relevant, available records is very important. New auditors are also trained to enforce the law without exception. For example, expect exceptions due to hardships or hazards of litigation to be handled in appeals rather than by the auditor.
It’s likely that the new auditors will be trained rather uniformly across the country. A typical audit may go like this: The auditor will generally confirm gross income through discussion with the taxpayer and by checking accounts for deposits of undeclared income. Financial statements used for third-party purposes such as bank loans are very useful, especially if the loan was granted, because when preparing such statements, it’s in the taxpayer’s best interest to have the highest possible income, contrary to the taxpayer’s motivation when preparing tax returns. Financial statements that are consistent with tax returns produce strong evidence, especially if the financial statements have been audited by a CPA.
In an audit for an individual, large losses, capital transactions, or carryover items may be targeted. In a corporate audit where the taxpayer owns a small corporation, the auditor may look for the existence of constructive dividends, shareholder loans, thin capitalization, and other items that are subject to shareholder/corporation arbitrage to avoid payroll taxes or double taxation of dividends. Where these opportunities exist, the shareholder is often also brought in to a corporate audit. Similarly, where an individual is influential in a partnership, the auditor may scrutinize guaranteed payments for services by examining both the partnership and partner’s returns.
Overall, auditors are being trained to look for an audit adjustment, an agreement, and where possible, a one-day audit. Not every audit fits this mold, and some audits may even be examined for civil fraud, especially if a taxpayer has a large amount of unreported income. Yet “one and done” is likely the auditor’s goal, where feasible.
As tax disagreements arise, the taxpayer’s representative might agree to table unagreed items until the audit is finished because they might ultimately be immaterial and concessions may be made. Alternatively, the taxpayer representative can agree to disagree with the auditor and prepare an appeal. This strategy is efficient for both the IRS auditor and the taxpayer representative, although appealing a case is more work for the auditor. This may cause an auditor trepidation about a case going to appeals, and the new auditor may be more favorable to a fair settlement.
With more IRS personnel, there will be more new auditors, and practitioners might meet up with these auditors many times in the future. First impressions may be the most permanent ones, so patience and empathy may just pay off.
© 2020 A.P. Curatola